Why Landlords & Real Estate Investors Need to Pay Themselves for Their Time
Don’t punch me, but I’m going to say it: Time is money.
You would not work for $1/hour, but you would probably be willing to work for $1,000/hour. Your time is worth a certain amount of money; how much depends on you.
If you flipped a house and earned $1,000, is that a win? Maybe. It depends on how much time the deal cost you. If it only cost you five hours of work, then at $200/hour most people would agree you did well. If it cost you 100 hours of work, then at $10/hour, maybe you should have run a lemonade stand instead – at least you’d have been able to relax outside.
Let’s reframe the example above into more useful terms, and this time we’ll use a word that was missing above: profit. For the sake of argument, let us say that you value your time at $25/hour, somewhere near the median income in America. You earned $1,000, but not all of that is profit. If it took you five hours of work, then your labor cost was $125, making your profit $875.
Or, it took you 100 hours of work, so your labor cost was $2,500. You did not have a profit, you had a loss of $1,500. You should have stuck with your day job, where you would have earned a reasonable wage for your work.
Consider another relevant example. Every month, landlords need to make an important decision: Should I manage my rental properties myself, or outsource the work to a property manager? The answer depends on several variables. In an average month, how much time does the property demand? How much is my time worth? How much would it cost to pay a property manager to do that work?
Let us say that 123 Main Street takes you about three hours each month on average to manage. That includes depositing the rent, fielding phone calls from the tenant, keeping a rent ledger of income and expenses, maybe mailing late rent notices, sometimes coordinating repairs with a handyman, etc. Using our $25/hour example wage, that means your labor cost is $75/month on average.
This provides a firm framework with which to make a rational decision on whether to hire the property manager. If the property management commission is 10% of a $700 rent, or $70/month, then you should hire the property manager. But if the commission is 10% of a $1,000 rent, or $100/month, then you should continue doing the work yourself… and paying yourself for it.
Paying yourself for your time ensures that you compare apples to apples, when deciding what work to do yourself, and what to outsource. It also ensures that you keep profit separate from your labor costs. After all, you could have invested your money in a stock, and never spent a minute working. Your return on investment needs to reflect your labor costs, so that you don’t end up working dozens of hours to earn the same ROI that you could have achieved just investing in a mutual fund.
Property management is particularly time-intensive for vacation rentals, so it's especially critical that landlords account for their labor costs if they want to profitably manage vacation rentals.
Each week, keep a record of how many hours you worked on your investment property. This exercise alone is extremely valuable; many real estate investors and landlords are shocked when they realize just how many hours they’ve been spending on their real estate investments each month. Each week you can make an instant online transfer from your business operating account to your personal account for the labor cost, and mark it in your rent ledger.
This practice will make you a better real estate investor, and a better landlord. It may reveal inefficiencies in your management or investing practices, where you can save time. It will also clarify your true profit, and the true cost of your real estate investments. You may even realize that you’ve been doing yourself what you could pay a more qualified professional less money to do for you.
Afraid you won’t like what you see when you account for your labor? Remember that most businesses are not immediately profitable, and there is a learning curve that most entrepreneurs must go through on their path to profits. How fast you move along that curve is largely dependent on how willing you are to look at brutal truths like your true profit and loss after all your costs are laid bare.
Labor costs count, whether those are paid to someone else or yourself. If you clean up your books, you may well find you’ve cleaned up your business and freed up more time in the process.